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Debt, Dictatorship, and Democratization

NEW YORK – After Saddam Hussein’s fall, the United States successfully pressed creditors to write off much of Iraq’s external debt. Senior American officials, including Paul Wolfowitz, later President of the World Bank, argued that the Iraqi people should not be saddled with obligations that the dictator contracted in order to enrich himself and oppress his subjects. Citing a long-standing doctrine in international law, advocates of a write-off claimed that Iraq’s debt was “odious.” As a result, the creditors were no longer protected under global legal rules.

As political change again sweeps across the Middle East, the issue of odious debt is back. But all debt that was contracted by a previous oppressive regime cannot, for that reason alone, be classified as “odious.” The question is this: how much of the money went to meritorious development projects, and how much went instead to prop up the regime and line its leaders’ pockets?

In the case of Egypt, for example, Minister of Economic Cooperation Faiza Abu al-Naga suggested in January that Mubarak himself was directing the country’s foreign-loan policy and “oversee[ing] the entire process.” Even if true, there may be nothing legally wrong with such an arrangement. After all, lending and aid to Egypt by the US and other Western powers have long been entangled with geopolitics, and using the tools of finance to back a loyal ally in an unstable region is not odious or illegitimate per se.

But, to the extent that the funds contributed to internal repression, or to the personal enrichment of the regime’s leaders, lenders may bear some responsibility, at least for relieving taxpayers of the burden of debt contracted against, or with indifference towards, their interests. This responsibility cannot be absolute or unlimited, however, and should be confined to situations where lenders were aware (or should have been aware) that the funds might be used for corrupt or oppressive ends.